We are passionate about the need for insurance but recognise that it is not a spend that people look forward to. With income protection policy holders set to see increases of up to 100% on their premiums over the next year, a review of your premiums over the next few months could save you significant money.
Why is this happening?
Income protection insurance in its current form has become an unsustainable product for insurance companies, with losses across the industry on this product totalling around $5 billion over the last five years. The Financial Review reported that four in ten life insurers reported losses in the 2020 financial year.
The two main reasons for the losses are:
- A larger increase in mental-health and musculoskeletal claims than were originally budgeted for by the insurers when they created the insurance products.
- Extremely low returns on investment. Insurers place their deposits into bonds and other fixed interest products and with interest rates at globally low levels, the insurers are simply not making the returns that were forecasted years before when the policies were being priced.
This means that the pricing on existing insurance policies is not viable, which is forcing insurance companies to increase their prices.
Which insurance is affected?
At this stage income protection insurance is the worst affected, however Trauma and Permanent Disability (TPD) policies are also likely to be impacted significantly over the next few years for similar reasons.
What if I don’t currently have insurance?
As a dentist, the most important asset you have is your income earning capacity. It is important to make sure this asset is properly insured.
The insurance regulator, the Australian Prudential Regulation Authority (APRA) is concerned that the terms of many insurance policies currently in place are too generous to be sustainable. In a bid to ensure the ongoing viability of income protection policies APRA have proposed two significant changes that are planned to come into force from the end of September this year.
Both the below changes are relevant to the dental industry.
Income Substantiation – during 2020 APRA ruled that insurance companies could no longer pre-set a ‘guaranteed’ amount to be paid at claim time based on your pre-application income. All new policies now require that in the event of a claim, you must substantiate your pre-claim income before you receive payment. In recognition that sole traders and small business owners have fluctuating income, you were able to use three years of financial data when supporting your income levels. Under the current APRA proposals, this substantiation period could be as low as the last 12 months, which means that in the event of a one-off drop in income, your potential future claim could be compromised. These changes come into effect from 1 October 2021 – with any policies in place prior to this date grandfathered.
Underwriting – at the moment, once put in place, your insurance remains operational as long as you continue to pay your insurance premiums. Under the current APRA proposals, income protection policies in place after 30 September 2021 will be subject to a 5-year term – with changes to your occupation, financial circumstances and any dangerous pastimes updated every 5 years and reflected in the new policy terms and conditions.
This means that if you wish to take out insurance coverage under the existing terms, it will need to be put in place before 30 September this year.
What should I do?
We understand that no one likes doing life-admin, however the best way to manage the premium increases is to have your insurance reviewed to ensure that:
- You have the appropriate types of insurance in place and the amounts you are insured for are appropriate. The consequences of being un-insured or under-insured can be dire. However, it may actually be that the levels of cover that you have can be dropped – which will help with affordability. As your personal and financial situation changes, you may need to change the types and amounts of insurance that you hold.
- The cost of the insurance policies you have in place is competitive. Even if premiums are set to increase, if you can lower your starting premium by sourcing a cheaper alternative, it can save you money in the long term. There are a number of ways to save money on your premiums, which includes changing insurers or renegotiating some of your policy terms, such as the length of period before which you can make a claim.
- The structure of the policy is the best for your circumstances. Some insurance premiums can be funded through superannuation which may make them more tax and/or cashflow effective. A number of insurance premiums are tax deductible which assists with their affordability.
Additionally, premiums can be stepped (which means that they start out cheaper but increase every year as you get older) or level (which start as more expensive but do not increase each year due to age). Depending on the age at which you put a policy in place, it may be cheaper to choose one over the other.
- Insurance coverage is locked in while particular policy types are still available. If your situation is such that you require the ability to have a guaranteed longer income substantiation period and permanent underwriting, then you will need to have your insurances in place by 30 September 2021.
Brent McCullough*
Senior Adviser
Ecovis Clark Jacobs Insurance
Elissa Lippiatt
Chartered Accountant and Director
Ecovis Clark Jacobs
Accounting and Business Advisers
*Brent McCullough and Ecovis Clark Jacobs Insurance are Authorised Representatives Bombora Advice Pty Ltd ABN 40 156 250 565 AFSL 439065.